10 Economic Concepts Everyone Needs To Understand

Whether you work as an economist or you try your best to ignore the bad financial news and your bank account, economics is at work in your life. It’s affecting your trips to the grocery store, your loan applications, and your paycheck, so you’d better at least try to understand some of the basics and most-used phrases. Knowing these concepts will benefit you whether you’re 18 or 80 and will help you be a better, more informed consumer and employee.

Supply and demand helps the masses understand why that hot toy they stood in line for hours to buy for their kid’s Christmas is a quarter of the price by March. Of course, knowing the basics of this concept won’t save you the holiday hassle, but at least you can feel like an informed consumer as you fight for the last Tickle Me Elmo. When the demand is high, the price goes way up. Manufacturers then make more of the product because they can make more money by producing that than something with a lower demand. The supply grows, making the price drop. The manufacturers then move on to the next in-demand product so they can make the most profit.

This is basically the pros and cons list your mom has been encouraging you to make for every life decision, only applied specifically to economics. You probably use it on a small scale when you find a really cute pair of shoes but don’t know if you should spend that much. Will the positive attention you get and your love for the shoes outweigh the dent you’ll be putting in your bank account? Governments and businesses use cost-benefit analysis to determine the worth of potential plans or policies. They consider the profits and social benefits, in monetary terms if possible, and see how they stack up against the costs.

When you take an opportunity, say choosing to accept a job offer, you’re giving up the other things you could’ve done with your time, like spending eight hours a day writing the next great American novel. An opportunity cost is basically the best alternative you’re sacrificing to take on whatever opportunity you’ve chosen. Even in economics, it can be monetary, like the money you would’ve made at the other job, or things like lost time or pleasure. The concept of opportunity costs can be applied to other areas of your life, too, like when you’re thinking about getting married and you have to carefully consider the awesome aspects of bachelorhood. Is it worth it?

Also known as the paradox of value, this little economics mystery is an interesting one to contemplate. It might even be worth discussing at parties if you have particularly nerdy friends. This concept looks at the fact that water is more useful to humans considering the whole, you know, survival thing, but diamonds are worth more in the market. A diamond could be sold for a large amount of money, while water is given away for free. Economists thought for a while that this contradiction might come from the amount of labor put into each commodity, but it’s now generally accepted that the answer is in the products’ marginal utility, or how useful each unit of the product is. Because there is so much water in the world, we are able to easily cover our highest-priority uses and use water for minor things like washing our cars and watering our lawns. This makes us value it less, but if there were a water shortage, we would gladly pay large amounts to make sure we had enough for our survival.

An incentive is kind of like a bribe, but we’ll call it a good bribe. It’s basically anything that motivates us to do a certain thing or buy a certain product. Economists will tell you that incentives are everything. They’re given to employees to encourage them to work hard (like bonuses and personal development) and given to consumers to give them a reason to buy (like discount cards). During hard economics times, they are particularly useful as they can keep businesses alive and give rewards to customers. As a consumer it’s important to understand how the incentives are benefiting you and also how they benefit the economy.

Though most economic concepts work together in the market, this one is very closely related to the following two ideas. The money supply is the amount of U.S. currency floating around out there, as well as the checking account deposits held by the public. It shouldn’t be surprising that the supply of money would have great effects our economy, since money seems to be the most basic element of economics. The money supply is altered largely through Federal Reserve policy, which can be used to affect bank deposits and print more money. You might think that just churning out more and more money would solve a lot of our financial problems since there would be plenty of cash available, but changes in the money supply can affect interest rates and cause inflation.

We hear this term a lot in our adult lives. Oh, how we wish for the simpler times when we could just take a buck or two from our piggy bank and not think about how much the pig would charge us. The interest rate is how much we have to pay to use someone else’s money or how much we earn when we let the bank use our money. It’s expressed normally as an annual percentage of the total amount borrowed, and often changes as the money supply expands and shrinks. It’s the reason you want to pay off all your loans as quickly as possible, since it really can start to add up. You might hear the terms real interest rate and nominal interest rate thrown around. Nominal just means inflation has not been taken into account and real means it has.

When you think back on what you used to be able to buy for a dollar and what you can get now, you’re getting a glimpse of inflation. Inflation is the increase in the overall prices of products and services in the economy. Each dollar buys less and we all probably start to feel poorer. A low, stable rate of inflation is normal and economists consider it ideal, but high inflation can happen when the money supply expands too much and too quickly. It’s obviously not seen as a great thing by consumers who have to pay more for goods, and there are other negative effects including less investment and savings and possibly a shortage of goods if people start hoarding them. But there is a silver lining for the economy: central banks can make adjustments to nominal interest rates that help ease recessions.

If you pay attention to the news, you can’t go a day without hearing someone talk about the unemployment rate. It’s easy enough to tell you the basic definition: the number of people in the civilian labor force divided by the number of people who are unemployed. Simple. But knowing exactly what that means and how to interpret the data is much more complicated. You first have to know who counts as being unemployed. To be unemployed in the U.S., you have to not have a job, have actively looked for work in the last four weeks, and be available for work. This means that people who have given up looking for work don’t count toward the unemployment numbers anymore. You should keep that in mind when interpreting changes in the rate, since some drops could mean lots of jobless people have just stopped trying. You should also compare the latest numbers with the same month the previous year to avoid getting confused by seasonal differences.

It doesn’t exist. Even the brightest economists will tell you, “There’s no such thing as a free lunch,” meaning nothing is entirely free of cost. One speculation of where the phrase originated is when saloons would give free lunch to anyone who bought a beer. They’d serve the men the saltiest foods so they’d end up buying more beer, thus making the meal cost something. Today, the concept isn’t too much different. If you think you’re getting something for free, you’re probably paying for it through hidden costs or costs that are distributed to someone else or society.